Underreaction
The Unconstrained Equity Fund is structured as a long-term strategy with a small, concentrated portfolio of 20 to 30 stocks with low turnover( most recently reported at 20 %). In that vein, Applied Materials was a relatively short-term holding.
Lin’ s team combines scrutiny of a company’ s insider buying with what he calls“ downside analysis,” which means finding companies resilient enough to withstand the inevitable negative shocks that all companies face over long periods.
That means investing in companies that are profitable and consistently freecash-flow positive while also boasting low debt levels. He further favors companies with few competitors operating in industries with high barriers to entry.
“ We like oligopolies and monopolies,” he says.
Lin applies the same downside analysis to see when investors are underreacting to a company’ s brighter prospects.
“ With this we’ re looking to exploit a different kind of behavioral bias,” he says. announces a positive earnings surprise sparked by a sustainable trend in the company’ s business fundamentals. The stock price initially goes up in these situations, yet the analysts following the company remain anchored in their existing forecast and only gradually raise their forecast to reflect the positive change going on in a company.
“ Because of this we find there’ s still alpha left in the stock even if you buy after this initial price increase,” Lin says.“ We found this can continue to go on for several quarters or even years as analysts continue to insufficiently raise their forecasts to reflect this change.”
Mega-Cap Alternative
FullerThaler isn’ t the only investment manager offering funds with a behavioral finance bent. Some of its competitors employ a quantitative strategy to detect human psychological mistakes made when investing. FullerThaler’ s non-quantitative approach was forged in part by the firm’ s relationship with the late psychologist
( The company had planned a late-August launch for the actively managed Fuller- Thaler Behavioral Growth ETF.)
Three of its mutual funds have attained top-quartile ratings within their Morningstar categories during the five-year period through early August.( The oldest fund was also a top-quartile performer in the 10-year period.)
Yet a couple of the firm’ s funds had placed in the bottom quartile during the five-year period. And even the Behavioral Unconstrained Equity Fund, despite being among the very best funds in its midblend category, had a clunker year in 2022. So the behavioral finance approach isn’ t necessarily foolproof.
Lin attributes his fund’ s performance lag in 2022 mainly to Russia’ s invasion of Ukraine, which caused a spike in oil prices. That benefited the energy sector, which his fund typically avoids because the companies in that arena generally don’ t meet his downside criteria.
“ In 2022 that hurt us on a relative basis, but we think that sticking to what we know
Lin says that investor overreaction to bad news is often accompanied by an extended period when the stock remains in the dumps. Investors get worn down and conditioned for bad news about a stock when it loses money.
“ We’ re looking to exploit the behavioral bias of overconfidence and anchoring.”
FullerThaler’ s view is that investors and financial analysts who do significant due diligence on a company and devise earnings models tend to become overconfident in their own analysis and anchored to the forecasts they’ ve come up with.“ So much so that when a new piece of information comes along that might cause them to question the assumptions they’ ve made, these analysts will often underreact to this new information,” Lin says.
From Lin’ s perspective, an investing opportunity occurs when a company
Daniel Kahneman, who won the 2002 Nobel economics prize for“ integrating psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.”
Kahneman became a FullerThaler board member, and his research was foundational for the firm’ s overreaction and underreaction investment strategies.
FullerThaler initially focused on separately managed accounts and didn’ t launch its first branded mutual fund until 2011. The remaining six funds in its current roster were rolled out in 2017 or later. The most recent fund debuted in 2023. works over the longer term and will produce better long-term results,” Lin says.
Indeed, the fund’ s strong results have attracted growing investor interest. Financial advisors are the primary customers of FullerThaler’ s mutual funds, and Lin says investors see his fund as a different way to think about U. S. equity exposure, going beyond the so-called Magnificent Seven and other mega-cap stocks that are easily found in large-cap index funds.
“ We have some clients who view the Unconstrained Fund as a complement to that passive core and as a way to get returns outside of the mega caps,” Lin says.
SEPTEMBER / OCTOBER 2026 | FINANCIAL ADVISOR MAGAZINE | 47